Merrill Lynch Sued By Former Employee

A Benton County man who sold to clients and personally invested in a security issued by Merrill Lynch Pierce Fenner & Smith Inc. is suing the company, contending the brokerage mistated material facts.

Brad Carson contends the New York-based brokerage misled potential investors in its prospectus for Constant Maturity U.S. Treasury Yield Increase Warrants, issued in October 1994. The brokerage and its holding company, Merrill Lynch & Co., are both named as defendants in the class-action suit, filed Sept. 4 in U.S. District Court in Fayetteville by Carson’s attorney, William B. Putman.

The brokerage issued 2.2 million warrants — options to buy stock at a specified price on or before a specified date — at $6 each, resulting in a total sale of about $13.2 million, according to the suit. Carson, who was a broker for the firm at the time, purchased 3,000 warrants for his own portfolio as well as recommended and sold them to his customers. He eventually sold at an $8,000 loss, the lawsuit states.

In following the warrants’ performance on the secondary market, Carson noticed that the instruments’ value was decreasing although, according to the criteria contained in the prospectus, it should have been increasing, the suit states. Investigating his findings, Carson learned from a Merrill Lynch manager that the decline occurred because the firm wasn’t using U.S. treasuries as its primary pricing mechanism as set out in the prospectus but was relying instead on a derivative known as the “Eurodollar Synthetic Forward Rate,” the suit states. He also learned that Merrill Lynch was a primary market maker for the warrants, a fact it failed to disclose in the prospectus, according to the complaint.

The lawsuit contends failure to disclose both those facts constituted “material omissions” and rendered the prospectus information “false, misleading and deceptive.”

Carson contends that the warrents would “probably not have been marketable if investors had known that a derivative was being used as the primary pricing mechanism.”

The complaint contends the defendants “deceived, manipulated and defrauded” investors.

Putman says the warrants, highly speculative investments, were nonetheless marketed by Merrill Lynch as being appropriate for fixed-income investors, who stood to lose portfolio value if interest rates rose. The warrants were supposed to be a hedge against rising interest rates, he adds. However, although interest rates rose, the value of the warrants fell.

The warrants were sold to 482 individuals in several states, including 47 investors in Arkansas, Putman says. Carson himself sold more of those warrants than any other Merrill Lynch broker, he adds.

The suit asks for rescission, a remedy that would return to investors all money lost and spent in fees, as well as punitive damages.

tttttttttt—Patricia May